Question 1

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)
A)signal.
B)screen.
C)efficiency wage.
D)agent.

Accepted Answer

A limited warranty serves as a signal to potential buyers that the seller believes the car is in good condition and is willing to stand behind it for a certain amount of time.

Question 2

Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of
A)moral hazard.
B)screening.
C)adverse selection.
D)the principal-agent problem.

Accepted Answer

The answer of Bob is planning to sell his home....

Question 3

"Signaling" refers to actions by an informed party for the sole purpose of
A)telling another party that the signaler has information to reveal, without actually revealing that information.
B)conveying false information.
C)induce employees to put in the effort they are capable of.
D)credibly revealing private information.

Accepted Answer

Signaling refers to the act of conveying information in a credible manner. Option D is the correct answer as it best reflects this definition by specifying the role of signaling in revealing private information.

Question 4

Which of the following is an example of an adverse selection problem?
A)A customer purchases four apples, two of which are bruised.
B)A card shop puts its Halloween merchandise on sale on November 1st.
C)A young job applicant fails to reveal that she was fired from her last job because she was incompetent.
D)A man rents a car and then drives it less carefully and fills it with cheaper gas than he would if he owned it.

Accepted Answer

Adverse selection refers to the scenario where one party in a transaction has better information than the other party. This can lead to a situation where the party with less information ends up making a decision that is unfavorable to them. In this case, the young job applicant failed to reveal important information about her previous employment, which could lead to a situation where the employer ends up hiring someone who is not suitable for the job.

Question 5

When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest quality, she is engaging in
A)both moral hazard and adverse selection.
B)neither moral hazard nor adverse selection.
C)moral hazard, but not adverse selection.
D)adverse selection, but not moral hazard.

Accepted Answer

Adverse selection refers to the situation in which the seller has more information about the quality of the product than the buyer. In this case, the jeweler is aware that the diamond is of low quality but sells it as the highest quality to the young man who is not aware of the differences in diamond quality. This is an example of adverse selection, but there is no moral hazard involved, as the jeweler is not taking any additional risk by selling the low-quality diamond.

Question 6

The state of Massachusetts requires all citizens to purchase medical insurance or face a monetary penalty when filing their taxes. The penalty is significantly less than the average annual insurance premium. Moreover, the state requires insurance companies to issue policies to anyone who applies, regardless of their health at the time of application. Which of the following examples describes the inherent adverse selection problem?
A)Tricia purchases an insurance policy through her employer and visits her doctor for annual check-ups.
B)Sue purchases insurance only after learning that she has cancer.
C)Mike pays the penalty rather than purchasing insurance because it is cheaper for him than paying insurance premiums and he is generally in good health.
D)Both b and c are correct.

Accepted Answer

Option B describes adverse selection as Sue purchases insurance only after learning she has cancer, which means that she presents more risk to the insurer. Option C also describes adverse selection as Mike, who is generally in good health, doesn’t purchase insurance as the penalty is cheaper than paying insurance premiums. This leaves the insurer with a group of people who are costlier to cover than expected. The other options do not describe adverse selection.

Question 7

A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a
A)moral hazard problem.
B)screening device.
C)signal of how much she cares for him.
D)All of the above are correct.

Accepted Answer

The gift is a signal of how much she cares for him, because it is a thoughtful gesture that reflects her desire to make him happy on his special day. The other options do not really apply in this context – a moral hazard problem (A) would arise if the woman's gift incentivized the boyfriend to engage in risky behavior, a screening device (B) would be more relevant in an employment context where a job candidate provides information to signal their qualifications, and D is not a valid answer because it includes choices that are not applicable in this scenario.

Question 8

When the buyer knows less than the seller about the characteristics of the good being sold, there is
A)a principal-agent problem.
B)a moral hazard problem.
C)an adverse selection problem.
D)a signaling problem.

Accepted Answer

When the buyer knows less than the seller about the characteristics of the good being sold, it creates an adverse selection problem. This occurs because the seller has more information about the quality of the product than the buyer, and may be incentivized to sell lower quality goods at a higher price. As a result, buyers are less likely to purchase the good in question, which can create market inefficiencies.

Question 9

The Latin term caveat emptor, meaning "let the buyer beware," brings to mind the problem of
A)hidden actions.
B)adverse selection.
C)principals and agents.
D)moral hazard.

Accepted Answer

The term caveat emptor warns buyers to be cautious and on guard when making purchases, implying that sellers may not disclose all information about the product. This can lead to the problem of adverse selection, where buyers may not have full knowledge of the quality of the product they are purchasing, and instead rely on incomplete information provided by the seller.

Question 10

A street vendor sells a replica of a pair of designer shoes to a young woman who believes the shoes are authentic. The street vendor is engaging in
A)both moral hazard and adverse selection.
B)neither moral hazard nor adverse selection.
C)moral hazard, but not adverse selection.
D)adverse selection, but not moral hazard.

Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, leading to an imbalance in risk. In this case, the street vendor is selling a replica of designer shoes while the young woman believes they are authentic, indicating that the street vendor has more information and is engaging in adverse selection. However, moral hazard occurs when one party changes their behavior after a transaction, such as taking more risks because they are insured. There is no indication that the street vendor is changing their behavior after the sale, so moral hazard is not present.

Question 11

Life insurance companies usually require applicants to have physicals and disclose information on their health. This practice is designed to address
A)a principal-agent problem.
B)a moral-hazard problem.
C)a problem involving hidden characteristics.
D)all of the above are correct.

Accepted Answer

The answer of Life insurance companies usually require applicants to...

Question 12

A brand of wine is priced at only $5 per bottle, far below the market price of most high quality wines. Before any reputation exists for the wine, consumers buy very little of this inexpensive wine because they interpret the low price to mean that the wine is of poor quality. The company decides to change the label on the wine to show that it has won awards for quality. This label change is an example of
A)signaling.
B)screening.
C)selecting.
D)All of the above are correct.

Accepted Answer

The label change is an example of signaling, as the company is using external signals (awards for quality) to convey information to consumers about the quality of their product and overcome the negative signal sent by the low price. Screening and selecting are not applicable in this scenario.

Question 13

People with hidden health problems are more likely to buy health insurance than are other people. This is an example of
A)moral hazard and makes the cost of health insurance higher than otherwise.
B)moral hazard and makes the cost of health insurance lower than otherwise.
C)adverse selection and makes the cost of health insurance higher than otherwise.
D)adverse selection and makes the cost of health insurance lower than otherwise.

Accepted Answer

This situation is an example of adverse selection, where those with a higher risk of needing medical care (people with hidden health problems) are more likely to purchase health insurance. This drives up the cost of premiums for everyone in the insurance pool because the insurer must cover the higher expected cost of care for the pool as a whole.

Question 14

The adverse selection problem is a likely explanation for the fact that
A)some parents use video cameras to monitor the nannies caring for their children.
B)some corporate managers were recently sent to prison for enriching themselves at the expense of shareholders.
C)people in average health may be discouraged from buying health insurance by the high price.
D)gifts can be interpreted as signals.

Accepted Answer

Adverse selection refers to a situation where buyers or sellers have better information than the other party and use that information to their advantage. In the context of health insurance, people in average health may be discouraged from buying insurance because they know they are unlikely to need expensive medical care, but insurance companies may not have access to that information and therefore price their policies to cover the cost of medical care for both healthy and sick individuals. This results in higher prices for everyone, which makes it less attractive for healthy people to buy insurance. This phenomenon is known as adverse selection.

Question 15

Which of the following is not an example of signaling?
A)screening
B)advertising
C)getting an education
D)gift giving

Accepted Answer

Screening involves selecting or hiring individuals based on specific criteria, whereas signaling refers to the actions individuals take to convey information about themselves. Advertising, getting an education, and gift giving can all be examples of signaling as they may communicate information about an individual's qualities, such as intelligence or status.

Question 16

The classic example of adverse selection is the
A)market for used cars.
B)market for new cars.
C)relationship between shareholders and managers.
D)relationship between a coach and an athlete.

Accepted Answer

Adverse selection refers to a situation where one party in a transaction has more information than the other party, resulting in the possibility of the informed party taking advantage of the uninformed party. The market for used cars is a classic example of adverse selection as the seller, who has more information about the quality and history of the car, may take advantage of a buyer who is uninformed about the car's true condition, resulting in buyers paying more than what the car is worth or ending up with a lemon.

Question 17

Severe adverse-selection problems may result in
A)too few good used cars being offered for sale.
B)wages that are too low relative to equilibrium levels.
C)too many good drivers buying too much automobile insurance.
D)people with average health buying too much health insurance.

Accepted Answer

Severe adverse-selection problems can result in a situation where only low-quality or defective goods are offered for sale, while high-quality goods are withheld from the market. This phenomenon is common in the used car market, where sellers with good cars are less likely to put them on the market due to the high likelihood of receiving a low price due to the presence of many low-quality cars. This can ultimately lead to a market failure, where buyers are unable to purchase high-quality goods even though they are willing to pay a fair price.

Question 18

Effective signals
A)convey useful information from informed parties to uninformed parties.
B)impose little or no cost on the signaler.
C)cannot be conveyed accurately when there is an information asymmetry.
D)raise the quantity sold but reduce the price sellers receive.

Accepted Answer

Effective signals provide useful information from parties who have more information to those who have less information. This can help to reduce information asymmetry and lead to better decision-making. Effective signals may involve some cost on the signaler, but the benefits typically outweigh the cost. Effective signals can also help to increase the quantity sold and the price received by the seller.

Question 19

Which of the following is not an example of signaling?
A)An employer calls the references of a potential employee before hiring him or her.
B)A boyfriend gives his girlfriend a necklace with her favorite gemstone for Valentine's Day.
C)A home flooring company advertises its high Better Business Bureau rating during its television commercials.
D)A company advertises that it makes charitable contributions.

Accepted Answer

The answer of Which of the following is not an...

Question 20

The buyer runs a risk of being sold a good of low quality when there is
A)a principal-agent problem.
B)a moral-hazard problem.
C)a problem involving hidden actions.
D)a problem involving hidden characteristics.

Accepted Answer

The problem of hidden characteristics arises when the buyer cannot observe or verify the quality of the good or service being sold. This creates an information asymmetry and the seller may have an incentive to sell a low-quality product that the buyer cannot differentiate from a high-quality one.

Quiz 22: Frontiers in Microeconomics

If the seller of a used car offers a limited warranty, the warranty is an example of a(n)

Bob is planning to sell his home. In preparation for the sale, he paints all of the ceilings in his house to cover up water stains from his leaking roof so that potential buyers will be unaware of this problem. This is an example of

"Signaling" refers to actions by an informed party for the sole purpose of

Which of the following is an example of an adverse selection problem?

When a jeweler sells a low quality diamond to a young man who believes the diamond is the highest quality, she is engaging in

A woman gives her boyfriend a birthday present. The gift could be viewed by the boyfriend as a

When the buyer knows less than the seller about the characteristics of the good being sold, there is

The Latin term caveat emptor, meaning "let the buyer beware," brings to mind the problem of

A street vendor sells a replica of a pair of designer shoes to a young woman who believes the shoes are authentic. The street vendor is engaging in

Life insurance companies usually require applicants to have physicals and disclose information on their health. This practice is designed to address

People with hidden health problems are more likely to buy health insurance than are other people. This is an example of

The adverse selection problem is a likely explanation for the fact that

Which of the following is not an example of signaling?

The classic example of adverse selection is the

Severe adverse-selection problems may result in

Effective signals

Which of the following is not an example of signaling?

The buyer runs a risk of being sold a good of low quality when there is